Time to Drain the Fed Swamp

By Brian S. Wesbury, Robert Stein, and Strider Elass

The Panic of 2008 was damaging in more ways than people think. Yes, there were dramatic losses for investors and homeowners, but these markets have recovered. What hasn’t gone back to normal is the size and scope of Washington DC, especially the Federal Reserve. It’s time for that to change.

D.C. institutions got away with blaming the crisis on the private sector, and used this narrative to grow their influence, budgets, and size. They also created the narrative that government saved the US economy, but that is highly questionable.

Without going too much in depth, one thing no one talks about is that Fannie Mae and Freddie Mac, at the direction of HUD, were forced to buy subprime loans in order to meet politically-driven, social policy objectives. In 2007, they owned 76% of all subprime paper (See Peter Wallison: Hidden in Plain Sight).

At the same time, the real reason the crisis spread so rapidly and expanded so greatly was not derivatives, but mark-to-market accounting.

It wasn’t government that saved the economy. Quantitative Easing was started in September 2008. TARP was passed on October 3, 2008. Yet, for the next five months markets continued to implode, the economy plummeted and private money did not flow to private banks.

On March 9, 2009, with the announcement that insanely rigid mark-to-market accounting rules would be changed, the markets stopped falling, the economy turned toward growth and private investors started investing in banks. All this happened immediately when the accounting rule was changed. No longer could these crazy rules wipe out bank capital by marking down asset values despite little to no change in cash flows. Changing this rule was the key to recovery, not QE, TARP or “stress tests.”

The Fed, and supporters of government intervention, ignore all these facts. They never address them. Why? First, institutions protect themselves even if it’s at the expense of the truth. Second, human nature doesn’t like to admit mistakes. Third, Washington DC always uses crises to grow. Admitting that their policies haven’t worked would lead to a smaller government with less power.

The Fed has become massive. Its balance sheet is nearly 25% of GDP. Never before has it been this large. And yet, the economy has grown relatively slowly. Back in the 1980s and 1990s, with a much smaller Fed balance sheet, the economy grew far more rapidly.

So how do you drain the Fed? By not appointing anyone that is already waiting in D.C.’s revolving door of career elites. We need someone willing to challenge Fed and D.C. orthodoxy. If we had our pick to fill the chair and vice chair positions (with Stanley Fischer announcing his departure) we would be focused on the likes of John Taylor, Peter Wallison, or Bill Isaac.

They would bring new blood to the Fed and hold it to account for its mistakes. It’s time for the Fed to own up and stop defending the nonsensical story that government, and not entrepreneurs, saved the US economy. Ben Bernanke and Janet Yellen have never fracked a well or written an App. We need a government that is willing to support the private sector and stop acting as if the “swamp” itself creates wealth. 
Don’t Buy Into “The Broken Window Fallacy”

By Doug Kass

The broken window fallacy was first expressed by the great French economist, Frederic Bastiat. Bastiat used the parable of a broken window to point out why destruction doesn’t benefit the economy.

In Bastiat’s tale, a man’s son breaks a pane of glass, meaning the man will have to pay to replace it. The onlookers consider the situation and decide that the boy has actually done the community a service because his father will have to pay the glazier (window repair man) to replace the broken pane. The glazier will then presumably spend the extra money on something else, jump-starting the local economy….

The onlookers come to believe that breaking windows stimulates the economy, but Bastiat points out that further analysis exposes the fallacy. By breaking the window, the man’s son has reduced his father’s disposable income, meaning his father will not be able purchase new shoes or some other luxury good. Thus, the broken window might help the glazier, but at the same time, it robs other industries and reduces the amount being spent on other goods. Moreover, replacing something that has already been purchased is a maintenance cost, rather than a purchase of truly new goods, and maintenance doesn’t stimulate production. In short, Bastiat suggests that destruction - and its costs - don’t pay in an economic sense. 

The broken window fallacy is often used to discredit the idea that going to war stimulates a country’s economy. As with the broken window, war causes resources and capital to be funneled out of industries that produce goods to industries that destroy things, leading to even more costs. According to this line of reasoning, the rebuilding that occurs after war is primarily maintenance costs, meaning that countries would be much better off not fighting at all. 

The broken window fallacy also demonstrates the faulty conclusions of the onlookers; by only taking into consideration the man with the broken window and the glazier who must replace it, the crowd forgets about the missing third party (such as the shoe maker). In this sense, the fallacy comes from making a decision by looking only at the parties directly involved in the short term, rather than looking at all parties (directly and indirectly) involved in the short and long term.

Investopedia, “The Broken Window Fallacy” 

Yesterday many – including Jim “El Capitan” Cramer – emphasized that the dual hurricanes in Florida and Texas were net economic positives as they would stem the peaking already apparent in autos and housing.

As Jim wrote:

It’s simple. When you get flooding like we had in Texas, you are going to have perhaps hundreds of thousands of people shopping for new cars, all at once. If you get storms that destroy houses with wind and rain, as is the case in Florida, you get checks to fix them up almost instantly.

While it is clear that the need to replace destroyed autos will reduce car inventories temporarily and assist in the sale of homes, the benefit – as described above in The Broken Window Fallacy – is not likely to be long-lasting or stem the peaks in car production and housing sales. Those who are looking at a net benefit are restricting their observations to only the parties directly involved in the short term, rather than looking at all the parties directly and indirectly involved in the short and long term:

* A rebuild of what you already had in Florida and Texas is restorative and does not increase an economy’s productivity or capacity.

* By contrast, the infrastructure build discussed by the administration is incremental; it increases productivity and makes the American economy better and stronger. As many of you know (see “The Orange Swan Returns With a Vengeance“), my view is that Trump’s infrastructure bill as well as tax reform and other legislation are unlikely to be passed on a timely and non-diluted basis. It may be argued now that the Florida and Texas rebuilds may be another excuse for non-passage. 

* The rebuilds from Hurricanes Harvey and Irma will increase the deficit due to the direct expenses and loss of tax revenues created by a business slowdown over the next two quarters from the storm’s damage. That deficit has now eclipsed $20 trillion.

* The rebuilds also may extend the already-stretched affordability issue facing housing, as it will increase building material prices and inflation, serving to increase the prices of homes.

* There is not an infinite supply of labor. The construction workers who will be moving to Houston and Tampa to rebuild are being taken away from other markets.

* Finally, in the local areas involved in the path of the worst destruction there is often a net loss as people leave and don’t come back. New Orleans’ population is about 80% today of what it was before Katrina. This is at best a zero sum, but in reality probably is a net loss because many people are uninsured and can’t afford to rebuild or buy again. In addition, there is a human toll on health, etc.
The Markets

We either are in one of the greatest bull markets of all time, fueled by eight years of more monetary cow bell, or our markets as in 2000 and 2007 likely are ignoring numerous uncertainties, extended valuations and other headwinds – as I say, rationalizing the irrational.

As an example, the markets rose modestly last Friday, anticipating a huge storm – and subsequent replenishment and rebuild – that could have resulted in more than $150 billion of damages.

Yesterday the markets ramped up by more than 25 S&P handles on light volume after never really going down because the hurricane’s wrath and impact was far less than initially anticipated.

To many it was a Goldilocks just-right outcome, as some thought the damage of the natural disasters was still enough to restrain the Fed’s tightening yet enough to halt the peaking of the automobile and housing industries. The former, autos, was suffering from too much inventory relative to sales, the need to expand incentives (a threat to auto industry profitability), lower used-car prices and a deterioration in subprime auto paper delinquencies. The later, housing, was threatened by stretched affordability and stagnating incomes.

To some, this contradiction is natural, but it is not natural to me.
Bottom Line

The hurricanes experienced over the last two weeks will result in a restoration and not in an incrementally improved and more productive U.S. economy.

Think “The Broken Window Fallacy.” Destruction does not benefit an economy.

I remain bearish on both stocks and bonds.

Three radical ideas to transform the post-crisis economy

Policies since the financial crash have been timid compared with historic examples

by: Martin Sandbu

A most striking fact about the global financial crisis and its aftermath is how far from striking the policy response has been. That is a change from earlier economic history. For the past century and more, the deepest political and economic crises have produced transformational reforms. This time is different.

Franklin D Roosevelt’s New Deal was the epitome of crisis turned into opportunity. Within months of taking office in 1933, Roosevelt had taken the dollar off gold to reflate the economy, shut down and reopened the banking system after equipping it with deposit insurance, launched large public works programmes, radically regulated Wall Street and introduced a minimum wage. Social security, trade liberalisation, and housing policy reform soon followed.

The New Deal was exceptional in its hyperactivity, but other crises, too, have seen large-scale efforts to recast our economic systems. In the late-19th century, endemic financial instability and increasingly concentrated wealth and market power in the US led to a permanent income tax, a central bank, and an earlier (Theodore) Roosevelt’s trustbusting. After the second world war, a consensus in all western countries created the social democratic mixed economies many now seem to long for.

Compared to any of this, the past decade’s policies have been pusillanimous. The 2008 financial crisis was the most violent economic shock to hit most of the rich world in a lifetime. Yet hardly any policy effort has emerged to match the magnitude of the challenge.

True, governments have reined in financial markets. True, too, the 2009 co-ordinated fiscal stimulus arrested the downturn. But the financial system has undergone much less change than in the 1930s, and the stimulus was far too quickly withdrawn. Europe’s banking union may in time bring radical change — though fierce resistance makes it too soon to say.

Monetary policy seems superficially to have stepped up to the plate. But even the “unprecedented” actions of central banks have amounted mostly to using well-tried tools — open-market securities purchases, interest rate cuts — at greater scale than before. There has been no revolution.

All in all, our generation of leaders has failed to show the boldness mustered in previous showdowns with history. If a politician with FDR’s mettle had appeared in 2008, or indeed today, what might he or she do? Here are three proposals a committed reformer should contemplate. Like the New Deal, they are radical but realistic.

A latter-day Roosevelt must, like the original, look at monetary reform. Now as then, the problem is how to avoid too much liquidity in the boom and too little in the bust. But this may be impossible so long as money creation — and destruction — remains in the hands of private, profitmaking banks.

Only a tiny fraction of the money supply consists of physical cash minted by central banks. The bulk is bank deposits, claims on private financial institutions created when those institutions issue loans.

So in exuberant times, the money supply expands too fast, causing resource misallocation and impossible expectations about future incomes. When the mood changes, banks create too little money to keep activity buoyant, credit issued in the boom goes bad, and debt deflation sets in.

Central banks’ “unprecedented” money creation has only partially offset this.

If private management of the money supply is a recipe for instability, the radical alternative is to nationalise the money supply. This is do-able today: central banks can offer accounts to all members of the public (or make central bank reserves available to everyone). Banks could be restricted to allocating existing savings to investments, rather than creating new credit.

Another imperative is that of economic security. Previous radicals created safety nets where none existed. Today we have ample welfare states, but they still leave large groups in precarious conditions. Sometimes they trap them there, as generous benefits for low earners are withdrawn with rising incomes, creating prohibitive effective marginal tax rates for the modestly paid. The radical solution is a universal basic income, the proposal to pay an unconditional benefit to all citizens, financed by tax rises. The idea is rediscovered by every other generation; the time to put it into practice may now have come.

Finally, revisit the US antitrust policies of the turn of the previous century, when leaders channelled popular resistance to the stranglehold of large oil, industrial and railway companies.

Today, internet giants enjoy a similar dominance.

A brave politician would seek to end internet platforms’ ability to skew our markets — and our politics. Internet services with economic functions similar to public utilities should be regulated as such so as to make them behave in the public interest.

Many sensible people will hesitate to embrace these ideas. But what if the alternative is not the status quo, but the nativist authoritarianism now on the rise? The deepest lesson from the Roosevelt era is that liberal centrists should wield their own radicalism lest they have radical illiberalism thrust upon them.

The Global Economy’s New Rule-Maker

Michael Spence

HSBC headquarters in China

MILAN – In a recent commentary for the South China Morning Post, Helen Wong, HSBC’s chief executive for Greater China, shows that China’s rising generation of 400 million young consumers will soon account for more than half of the country’s domestic consumption. This generation, Wong notes, is largely transacting online, through innovative, integrated mobile platforms, indicating that it has already “leapt from the pre­web era straight to the mobile Internet, skipping the personal computer altogether.”
Of course, China’s rising middle class is not news. But the extent to which digitally oriented younger consumers are driving rapid growth in China’s service industries has not yet received ample attention. Services, after all, will help drive China’s structural transition from a middle- to a high-income economy.
Not too long ago, many pundits doubted that China could make the shift from an economy dominated by labor-intensive manufacturing, exports, infrastructure investment, and heavy industry to a service economy underpinned by domestic demand. But even if China’s economic transition is far from complete, its progress has been impressive.
In recent years, China has been offloading its labor-intensive export sectors to less-developed countries with lower labor costs. And in other sectors, it has shifted to more digital, capital-intensive forms of production, rendering labor-cost disadvantages insignificant. These trends imply that supply-side growth has become less dependent on external markets.
As a result of these changes, China’s economic power is rapidly rising. Its domestic market is growing fast, and could soon be the largest in the world. And because the Chinese government can control access to that market, it can increasingly exert its influence in Asia and beyond. At the same time, China’s declining dependence on export-led growth is reducing its vulnerability to the whims of those who control access to global markets.
But China does not actually need to limit access to its own markets to sustain its growth, because it can increase its bargaining power by merely threatening to do so. This suggests that China’s position in the global economy is starting to resemble that of the United States during the post-war period, when it, along with Europe, was the dominant economic power. For decades after World War II, Europe and the US represented well over half (and near 70% at one point) of global output, and they were not heavily dependent on markets elsewhere, other than for natural resources such as oil and minerals.
Now, China is rapidly approaching a similar configuration. It has a very large domestic market – to which it can control access – rising incomes, and high aggregate demand; and its growth model is increasingly based on domestic consumption and investment, and less on exports.
But how will China wield its increasing economic power? In the post-war period, the advanced economies used their position to set the rules for global economic activity. They did so in such a way as to benefit themselves, of course; but they also tried to be as inclusive as possible for developing countries.
The post-war powers certainly did not have to take that approach. It was within their power to focus far more narrowly on their own interests. But that might not have been wise. It is worth remembering that in the twentieth century, following two world wars, peace was the top priority, along with – or even before – prosperity.
China shows every sign of moving in the same direction. It most likely will not pursue a narrowly self-interested approach, mainly because to do so would diminish its global stature and clout. China has shown that it wants to be influential in the developing world – and certainly in Asia – by playing the role of a supportive partner, at least in the economic realm.
Whether China can achieve that goal will depend on what it does in two key policy areas. The first is investment, where China has moved aggressively by introducing a variety of multilateral and bilateral initiatives. For example, in addition to investing heavily in African countries, it created the Asian Infrastructure Investment Bank in 2015, and, in 2013, announced the “Belt and Road Initiative,” meant to integrate Eurasia through massive investments in highways, ports, and rail transport.
Second, how China manages access to its vast internal market, in terms of trade and investment, will have far-reaching consequences for all of China’s external economic partners, not just developing countries. China’s domestic market is now the source of its power, which means that the choices it makes in this area in the near term will largely determine its global standing for decades to come.
To be sure, China’s current position on domestic-market access is less clear than its economic ambitions abroad. But China will most likely move toward an open, largely rules-based multilateral framework. The lesson from the post-war period is that this approach will do the most good externally, and will thus enhance China’s international influence. At this stage of China’s development, such an approach will have few if any costs, while most likely conferring many benefits.
What remains to be seen is how China’s relationship with the US fares. The US is suffering from non-inclusive growth patterns and related political and social upheavals. And it now seems to be departing from its historical post-war approach to international economic policy.
But even if the US is isolating itself under President Donald Trump, it is still too big simply to ignore. If the Trump administration enacts aggressive policies directed at China, the Chinese will have no choice but to respond.
Still, in the meantime, China can continue to pursue a rules-based multilateral approach, and it can expect broad support from other advanced and developing countries. The key is not to be distracted by America’s descent into nationalism. After all, it is anyone’s guess how long that will last.

China Slows Again: Hedge Your Growth Bets, But Don’t Panic

It’s getting harder to argue that weak numbers in July were just a heat-related fluke

By Nathaniel Taplin

Chinese data, change from a year earlier

One month of weak data could be a fluke—China’s record-high July temperatures led many to attribute the underperformance to a heat wave. Two in a row is harder to dismiss.

After a strong first half that confounded economists’ predictions of slower growth, China is now clearly downshifting. August industrial production was the weakest since December, while investment growth in the year to date hit its lowest level since 1999, according to official figures.

That followed July data that widely undershot expectations.

Slower credit growth following Beijing’s high-profile campaign against financial excesses earlier in the year, which pushed bond yields sharply higher, is finally beginning to bite.

In one sense this is a welcome development: The biggest slowdown last month was in infrastructure investment, which ticked down to 11% growth year over year from nearly 16% in July. Infrastructure projects of dubious merit are arguably the biggest source of China’s bad debt problem. More than half of all new liabilities at state-owned firms built up between 2007 and 2015, some 40 trillion yuan ($6 trillion), were infrastructure- and public-service related according to Andrew Batson, China Research Director at Gavekal Dragonomics. Many of those projects are uneconomic and now spend their time weighing down bank balance sheets rather than contributing to growth.

The problem is that Chinese infrastructure is a huge driver of both domestic industry and demand for materials world-wide.

In line with slowing investment growth, most key Chinese industrial indicators moved lower last month: Steel output slowed while cement production dropped outright on the year, falling at its fastest rate since 2015. Electricity production growth nearly halved, while coal power output dropped from 10.5% growth in July to just 3.5% in August. Numbers like that will likely put a damper on recent rallies in iron ore and coal.

Chinese data, change from a year earlier

While this all sounds unpleasant, there are a few reasons for guarded optimism. First, real-estate investment in August ticked up again to 7.8% growth from the same time a year ago, reversing its drop to just 4.8% in July. The July figure was the lowest in a year and a bearish signal on the single most important sector for Chinese growth and commodity demand. Second, credit growth picked up again in July, in a sign that policy makers are also concerned that investment is now slowing too quickly.

With debt servicing costs at coal and steel plants still high, China’s economic mandarins are unlikely to permit an overly sharp slowdown in investment that could tank commodity markets, particularly right ahead of the twice-a-decade Communist Party leadership shuffle kicking off in mid-October.

China is slowing again, which means the giddy part of the global commodities—and associated reflation trades—is likely over. It isn’t time to run for the hills yet, but now would be a good time to start taking profits.

Misusing U.S. Sanctions Will Sap Their Power

America’s central role in finance gives it unique clout, but this could erode if Congress isn’t careful.

By Jarrett Blanc

Then-candidate Donald Trump at a rally in Washington, Sept. 9, 2015.
Then-candidate Donald Trump at a rally in Washington, Sept. 9, 2015. Photo: Bloomberg News

Since taking office President Trump has not hesitated to threaten or implement sanctions against countries like Venezuela and North Korea. Sanctions are useful tools, but Mr. Trump and bipartisan majorities in Congress run the risk of making them less effective.

The U.S. economy’s size is not the primary reason its sanctions are so powerful: Countries without a significant trade relationship with the U.S. can still be severely damaged by bilateral sanctions.

Though the European Union’s gross domestic product almost matches America’s, EU sanctions are much less devastating. This influence derives from America’s central position in international finance—particularly its control over the invisible plumbing that allows money to move around the world.

Recognizing how much of their work touches the U.S., major foreign banks will often go so far as to treat themselves as “U.S. persons” for legal and regulatory purposes. Countries or entities subject to U.S. sanctions thus have a very difficult time with even simple banking transactions, which is catastrophic for trade.

Yet America’s dominant place in international banking, like its position in the broader international system, can be lost. The international financial plumbing can be changed with the investment of time and resources by banks, governments and regulators. So far there have not been sufficient incentives to make those changes, but governments and banks will reconsider if the U.S. abuses its position.

Policy makers and regulators in the U.S. have long been sensitive to this risk. They have taken it into account in the application of new sanctions and have worked closely with foreign banks to ensure they’re doing permissible business—even business barred to their American competitors. For example, outreach surrounding the Iran deal was designed to assure foreign businesses and regulators that remaining U.S. sanctions were tailored and not a back door to enforcing the sanctions lifted by the deal. Thanks to these efforts, major foreign banks working with Iran have largely chosen to work with U.S. officials and stay in careful compliance.

The U.S. government’s caution seems to have been lost with the latest sanctions against Iran, Russia and North Korea—legislation that passed with overwhelming support from both parties and was signed into law by a hesitant Mr. Trump. The new sanctions will do little to change the kinds of commerce allowed with the target countries. The law’s main function is to shift influence over lifting sanctions from the White House to Capitol Hill.

Congress has historically found it more attractive to levy sanctions than to lift them. Sanctions generally target adversaries, so that even if a country changes the policy that prompted sanctions, it likely will have other problems with the U.S. Some members of Congress will be tempted to promote these remaining issues as new reason to keep sanctions in place. That’s why the 1974 Jackson-Vanik restrictions on most-favored-nation status for Russia stayed in place for a generation after Russia opened up emigration restrictions, the legislation’s original aim. Mr. Trump is right to say the shift in power toward Congress will make it harder to use sanctions as a chit in international negotiations.

For those who are deeply concerned by Russian meddling in other countries’ elections—and by Mr. Trump’s apparent nonchalance—congressional authority over sanctions may feel like progress. For banks, governments and regulators abroad, it looks as if the U.S. is turning sanctions from means of achieving particular ends into permanent stigmas. That makes it more attractive to find ways to leave the U.S. banking system.

Mr. Trump also is threatening loudly to trash the Joint Comprehensive Plan of Action, better known as the Iran deal. Never mind that America’s international partners and the intelligence community agree that Iran is fulfilling its commitments. The U.S. built an international consensus that Iran’s nuclear program was a problem. European and Asian partners took appropriate action, suffering real economic harm by ratcheting back oil purchases and other commerce with Iran and then working to negotiate the deal. If the U.S. cannot take “yes” for an answer, those same partners likely will be at least as concerned about the threat posed by America’s financial power as the threat of Iran’s nuclear program.

In a time when U.S. consistency and reliability is openly questioned by some of America’s closest allies, threats of permanent sanctions will draw more attention to the risks of being dependent on the U.S. financial system. America’s importance as an international financial hub will not disappear overnight, and neither will the reach of U.S. sanctions. If the U.S. comes to be seen as an untrustworthy custodian, there will be a slow and inexorable erosion of America’s role and influence.

Sanctions compare favorably with any other tool the U.S. has—and certainly very favorably to military action. Sanctions can help address real problems in the world, which is why the U.S. should not fritter them away.

Mr. Blanc, a senior fellow at the Carnegie Endowment for International Peace, was the State Department coordinator for Iran nuclear implementation (2015-17).

Day Trading in Wall Street’s Complex ‘Fear Gauge’ Proliferates


Seth M. Golden day trades Wall Street’s index of volatility, the VIX, from his home office in Ocala, Fla. Credit Charlotte Kesl for The New York Times        

Seth M. Golden day trades Wall Street’s index of volatility, the VIX, from his home office in Ocala, Fla. Credit Charlotte Kesl for The New York Times

Each morning, at the market’s open, Seth M. Golden, a former logistics manager at a Target store, fires up the computer in his home office in northern Florida and does what he has done for years: Put on bets that Wall Street’s index of volatility, the VIX, will keep falling.

It has been a lucrative strategy as the so-called fear gauge has been, outside of the occasional spike, largely fearless — confounding experts by sloping persistently downward and in the process making Mr. Golden a multimillionaire.

“There has been a lot of white noise,” said Mr. Golden last Tuesday on a day that the VIX plummeted more than 10 percent, allowing him to lock in profits from short trades. “You had North Korea, Afghanistan, Trump people resigning. But I was never nervous — so today I just sat back, ate some popcorn and cashed in my profits.”

On Monday, the index ticked up, after falling 8 percent on Friday, as investors took the view that the Fed would not be raising interest rates soon after a speech by Janet L. Yellen, the chairwoman of the Federal Reserve.

Twenty years ago, when the shares of dot-com and tech companies soared and swooned, investors loading up on hot tech stocks would define the speculative fever of that era. Across the country, people quit their day jobs to trade the likes of Webvan and eToys from their living rooms or glittery new E-Trade outlets.

Now, a new generation of day traders, deploying an expanding array of opaque, high-risk, high-return trading vehicles concocted by Wall Street, are pouring into one of the market’s most arcane corners, making bets on whether the VIX — otherwise known as the Chicago Board Options Exchange Volatility Index — will rise or fall.

Wagering on the fear gauge, a measure of how volatile investors expect stock markets to be in the month ahead, has traditionally been the province of highly specialized investors with the cash and financial relationships to purchase the derivatives that facilitate these trades.

In the years after the financial crisis, however, investment banks like Barclays and Credit Suisse came out with VIX-linked investments that investors could purchase on the stock exchange, just as if they were buying shares of IBM or Microsoft.

Called exchange traded notes, they were a racier version of the exchange traded funds, or E.T.F.s, that track every variety of index and investment strategy and now have more than $4 trillion in investor assets.

Led by Barclays iPath S&P 500 Short Term Futures ETN (VXX), these investments have attracted over $14 billion in investor flows since 2012, according to FactSet, a data-gathering firm.

There are now more than 30 different VIX-themed investment choices (including some that use leverage, amplifying gains and losses) that investors can snap up on a public exchange.

Because they are so easy to trade and because the question driving the trade — Will the markets succumb to fear or won’t they? — borders on the existential, a new wave of millennial day traders has been at the forefront of this trade.

And many are using Stock Twits, the social media investing website embraced by stay-at-home investors, as well as Twitter and Facebook to passionately promote their strategies.

“You could describe it as a cult — it is about how you define and measure fear and can you trade it,” said David Moadel, an independent trader who uses social media to identify and interview emerging investors.

But this explosion in interest is prompting concerns that investors may not be truly aware of what they are getting into.

Today, VIX-themed entities are among the most actively traded securities on the public stock markets. The Barclays iPath note, Ultra VIX Short Term Futures (UVXY) by Pro Shares, and Daily 2X VIX ETN (TVIX) and Daily Inverse VIX ETN (XIV), both by Velocity Shares, are frequently among the most widely traded stocks of the day.

In theory, the murky nomenclature of these investments ought to be warning enough for amateur investors to tread with caution. And it is also true that the fund prospectuses warn bluntly that investors can lose large sums of money if they buy and hold these investments.

Robert E. Whaley, a financial professor at Vanderbilt University, who is known in volatility circles as the “father of the VIX,” for the work he did in helping the Chicago Board Options Exchange develop the index, says he has told the Securities and Exchange Commission that these securities are too risky for many nonprofessional investors.

“These are incredibly complex products when you consider their price dynamics,” Mr. Whaley said. “The volume in these things is huge, and my concern is that investors don’t understand what they are and how their prices behave.”

The S.E.C. has in the past publicly warned investors about the risky nature of these types of investments.

Indeed, the most popular of the funds, the Barclays iPath fund, known broadly by its ticker symbol VXX, has since its inception averaged a yearly return of negative 58 percent, according to FactSet.

Or look at it this way: If an investor bought VXX when it came to market in 2009 and held onto it until now, that investor would have lost 99 percent of his investment.

While many professionals will purchase these securities to hedge their exposure to the stock market, analysts say that day traders are now using them to gamble on a sharp spike in the VIX.

“You have seen this infusion of millennials coming in and buying VXX and UVXY,” Mr. Moadel said, referring to the main VIX product and its leveraged cousin. “But most of the time they just get killed.”

Doing the killing, so to speak, have been investors like Mr. Golden, who consistently shorts VXX and UVXY whenever they spike upward.

His bet is founded on two principles: one being that VXX and UVXY, because they track a basket of VIX futures, not the index itself, will decline in value over time as the contracts expire.

He describes it as a heavy anvil weighing down on the value of each security.

Mr. Golden also believes that in the decades since the VIX was introduced in 1993, its long-term trend has been to push consistently downward. Yes, there will be spikes as during major cataclysms (9/11, the 2008 financial crisis) and other less tumultuous events (a devaluation in China, a North Korea crisis or even a presidential tweet).

But after every spike of fear must follow a longer period of calm, Mr. Golden contends, which, he argues, is a perfect scenario if your bias is to always bet against fear.

“The nature of volatility is that it desensitizes over time,” he said. “Which is why the index has been tracking down for so long.”

Just as the frenetic buying of tech stocks by day traders in 1999 and 2000 came to be seen as a major factor behind the boom and bust, market experts say that traders like Mr. Golden who persistently short the VIX have distorted the market.

“The VIX spikes have become more extreme — on the upside and the downside,” said Salil Aggarwal, a derivatives strategist at Deutsche Bank.

Mr. Golden, who is 40, lives in a suburb of Ocala, Fla. Since he has been shorting VIX, he says his net worth has gone to $12 million from $500,000 in about five years.

When it comes to his craft, he is more the pedant than boastful trader, carefully posting snapshots of his trades on his Twitter feed and churning out dense treatises and videos laying out his methods. The best part of his day, he says, is picking up his toddler daughter from day care.

But, as with any trader on a roll, he likes to keep score, and he is quick to spar on Twitter with the traders who appear on CNBC’s “Fast Money” program.

Now, he is starting a hedge fund dedicated to wagering against the VIX. Investors, he says, have been pounding on his door to get in early, offering him $100 million for starters.

That is a lot of money for a onetime Target manager.

“Yes, it is a crowded trade,” Mr. Golden acknowledged. “But I don’t worry about crowds — I just worry what the next existential shock might be.”